In the debate over which mortgage is better, an Adjustable-Rate Mortgage or a Fixed-Rate Mortgage, it all comes down to what you need. Interest rates and mortgage options change often, so your choice should really depend on the following factors:
- The current interest rates and mortgage options available to you at the time of purchase
- Your view of the future (generally, high inflation will trigger ARM rates to go up and lower inflation will cause them to fall)
- Your personal financial and investment goals
- How willing you are to take a risk
Advantages: An ARM is mostly beneficial for those homeowners looking to stay in their home for a short period of time. This would apply to first-time homeowners as well as those who are in the business of “flipping” houses.
Disadvantages: Over the next five, ten or thirty years, interest rates are more apt to go up than down. Even if rates could go a little lower in the short run, an ARM’s teaser rate will adjust up soon. You won’t gain much if you plan to stay in the house more than a few years. In the long run, ARMs are likely to go up, meaning many buyers would be better locking in a favorable rate now and not taking the risk of much higher rates later.
Advantages: When mortgage rates are low, a fixed-rate mortgage is the best bet for many buyers. You’ll know exactly what your principal and interest payments will be, right down to your last payment. (Your total monthly payments, however, are apt to increase as property taxes and insurance rise.) And, as with any mortgage, you always have the option of refinancing at a later date if rates drop lower than your initial fixed rate.
Disadvantages: If you don’t plan on staying in your home for more than a few years, then you could have potentially enjoyed a lower rate with an ARM.
Check out our loan calculator to help you decide what works best for you.